E1: Cash Flow Forecasts

Question 1

What is a cash flow forecast?

Answer 1

Its a document that shows the predicted flow of cash into and our of a business over a given period of time, normally 12 months

Question 2

What does a cash flow forecast do?

Answer 2

Cash flows into and out of a business on a regular basis. A cash flow forecast tries to predict in advance what and when these cash flows will be.

Question 3

What is crucial to a business when it comes to cash?

Answer 3

Having a healthy cash flow is crucial to the survival of a business

Question 4

What does a healthy cash flow mean?

Answer 4

It means that a business will have enough cash at any one point in time to be able to meet demand for short term cash outflows.

Question 5

Why are cash flow forecasts benficial to a business?

Answer 5

By forecasting cash flow in advance, a business can identify where there might be shortages and either try to prevent it from happening or put plans in place to deal with it.

Question 6

What are cash inflows/receipts?

Answer 6

Money coming into the business from various sources

Question 7

What are some examples of cash inflows/receipts?

Answer 7

• cash sales- the customer pays at the time of purchase
• credit sales- the customer pays in pre-agreed period after the sale,for example 30 days
• loans- bank loans to fund the purchase of assets such as machinery and vehicles
• capital introduced- money invested from entrepreneurs or shareholders when a business is first set up or looks to expand
• sales of assets- the sale of items by businesses which are no longer needed in order to bring a short term cash in business
• bank interest received- interest paid by bank on credit balances.

Question 8

What is a cash outflow/payments?

Answer 8

Money going out of the business for various purposes

Question 9

What are the examples if cash outflows/payments?

Answer 9

• cash purchase- items purchased by a business and paid for at the time of purchase
• credit purchases- items purchased by a business and paid for at a later point in time
• purchase of assets- non-current assets that a business is likely to keep for more than one tear such as machinery and vehicles.
• VAT- businesses that are VAT registered must pay to HM revenue & customs (HMRC), and this should be shown in the cash flow forecast
• bank interest paid, rent, rates, salaries, wages, utilities

Question 10

What does a cash flow forecast show?

Answer 10

Its a simple statement showing opening balance, cash in, cash out, and closing balance

Question 11

What is the opening balance in a cash flow forecast?

Answer 11

How much money the business has at the start of the month.

Question 12

What does the closing balance show on the cash flow forecast?

Answer 12

The closing balance shows how much money it has at the end of the month
• e.g the closing balance at the end of January becomes the opening balnce at the start of February

Question 13

You will need to know the formula to calculate the closing balance:

Answer 13

Opening balance + cash inflows -

Cash outflows = closing balance

Question 14

What has 2 major influences on a business’s cash flow?

Answer 14

Credit periods

Question 15

What are credit periods?

Answer 15

The length of time given to customers to pay for goods and services

Question 16

What effect does credit periods have on cash flow forecasts?

Answer 16

They affect the ability of the business to gain credit from its suppliers. If a business can secure on credit, then this will slow down the flow of cash out of a business. The longer the credit period, the later the cash flows out. Some businesses can secure credit periods of 30,60 or even 90 days

Question 17

What happens if a business has a negative closing balance?

Answer 17

A business with a negative closing balance is often said to have liquidity problems and it is in danger of becoming insolvent.

Question 18

What is meant by the terms liquidity and insolvent?

Answer 18

• Liquidity- measures a firms ability to meet short term cash payments
• insolvent- when a firm is unable to meet short term cash payments